Real Estate Ownership in the United States

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Volume II, Number 4 – June/July 1993

© Donlevy-Rosen & Rosen, P.A.

REAL ESTATE OWNERSHIP IN THE UNITED STATES:

The American Dream – or Your Nightmare?

INTRODUCTION. Do you own real estate? Are you a shareholder in a closely-held corporation or a partner in a partnership that owns real estate? Are you a trustee of a trust that owns real estate? If you answered “yes” to any of these questions, you should read on….

In our last issue, we surveyed the environmental regulatory scheme and described in general terms the many sources of state and federal liability faced by property owners. In this issue we further examine your exposure to this type of liability.

ACTUAL COSTS AND LIABILITIES. Liability for hazardous waste contamination is, in a word, immense. In perhaps the most “super” of Superfund actions, involving Shell Oil Company and the Department of the Army, the liable parties agreed to remediate hazardous wastes released during the production of chemical weapons and pesticides at the Army’s Rocky Mountain Arsenal in Denver, Colorado. Clean up is expected to take twenty years and exceed $3 billion in costs. Shell Oil estimates its own liability will exceed $1 billion.

While not all cases are quite so spectacular, “routine” environmental liability is still severe. Theaverage proposed settlement announced by the Department of Justice (“DOJ”) refunding U.S. response costs for the month of January 1993 was just over $1 million. This figure does notreflect the additional liability which might be owed to third (private) parties above and beyond that due to the government. In May, for example, DOJ required a Colorado manufacturing plant to pay $1 million for natural resource damages under CERCLA. However, residents of the city where the plant is located had already won a $28.1 million judgment for cleanup and damages for the very same contamination.

POTENTIALLY RESPONSIBLE PARTIES. It is commonplace for individuals to be mistaken as to their exposure to liability in this area. However, lack of a direct and immediate connection with the cause of pollution does not necessarily shield one from liability. A variety of different parties and entities have cause for concern:

Lessor Liability: The owner of real property, as a lessor, has an absolute duty under CERCLA to prevent another from using his property in a harmful manner. A lessor is strictly liable for conditions on his or her property caused or created by his or her lessee. In one prominent case, the owner of a warehouse, who merely leased the warehouse to a company that operated a silver recovery business, was held liable for costs incurred to clean up a spill of sodium cyanide caused by his tenant – costs that exceeded $1 million. The lessor was held liable even though he had no knowledge whatsoever of the environmental contamination being caused by his lessee. Lessees are equally liable for the contamination of their sublessees, regardless of their knowledge of the contamination. Moreover, lessors are liable for contamination caused by subtenants! Do you lease (or does your tenant lease) space to a dry cleaner, a photo lab, a gas station, or other business that might release substances on your property?

Corporate Shareholders and Officers: Corporate officials, officers, and managers who are involved in day to day operations or otherwise have control or knowledge of waste practices and standards are routinely found liable as owners and operators. Stockholders, who normally rely on the corporate form of doing business as insulation from personal liability for corporate activities, have been found liable for contamination caused by their corporations where they were involved in the corporation’s daily management. The foregoing applies with equal force to majority stockholders, minority stockholders, sole stockholders, and partners in partnerships.

Successor Businesses: The purchase of a going business is often structured as a purchase of the business assets, instead of as a purchase of the shares of the company, based upon the belief that such a structure will shield the purchaser from unknown taxes and other liabilities of the acquired business. However, a company that purchases the assets of a corporation that had previously disposed of or released hazardous wastes is nevertheless liable for environmental contamination of its predecessor where the purchaser continues the business formerly operated, even where the successor company discontinues the environmentally harmful practices of its predecessor. Any one of the following factors may suffice to trigger a successor’s liability: (i) holding the business out as a continuation of the predecessor enterprise; (ii) continuity of assets (including business location and buildings); (iii) retention of the name of the prior company; (iv) retention of the same employees or supervisors; (v) retention of the same production facilities; or (vi) retention of the same product. In one case, a widow who actively carried on her deceased husband’s business was held liable where she made no significant changes in personnel, even though the court found she probably had no reason to anticipate incurring environmental liability.

Fiduciaries: Trustees who have power to control and use trust property and knowingly allow it to be used for hazardous waste disposal may be PERSONALLY liable for cleanup costs which exceed the trust’s assets.

CONCLUSION. CERCLA is not the only source of environmental liability. Severe penalties and costs are provided under a variety of federal environmental statutes such as the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act (“RCRA”) and many state laws as well, such as the Florida laws regulating underground storage tanks. Moreover, liability attaches not only to “intentional” polluters, but “incidental” polluters, such as lessors, and arguably innocent parties, such as a landowner whose property has been impacted by the underground migration of pollutants from adjacent properties.

Since the ultimate efficacy of environmental risk insurance is questionable, asset protection planning should be seriously considered by the real estate owner/investor. Asset protection planning can be very effective in protecting one from a financial catastrophe caused by environmental liability, IF the planning is undertaken before a problem developes. When would this be? Very possibly, this would be before making that next real estate purchase, but most certainly it would be before an environmental problem is discovered on existing property.

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